Hedge funds mum about ETF use

Hedge fund managers are the third-biggest institutional users of exchange-traded funds and exchange-traded products, but they’re reluctant to talk about it.

That’s because pension fund, endowment and foundation clients won’t be happy if the hedge fund managers they are hiring for their exceptional investment skills and for which they are paying high fees — 2% for management and 20% for performance — are relying too much on lower-cost index-based products like ETFs and ETPs.

“Investors in hedge funds are paying big fees for active management equity selection. If a long/short manager goes long individual equities and only shorts ETFs and (indexes), it is a terrible deal for investors (because) fees should be a lot lower,” Jim Vos, CEO, head of research and principal at hedge fund consultant Aksia LLC, New York, said in an e-mail.